There’s gold in them thar pills
Dear Mr. Berko:
My father, who will be on Medicare next year, has asked me to explain the dollar allowances and payments of the drug plan recently passed by Congress. Would you, sir, be good enough to explain this in language we can understand?
My second question concerns $18,000 that I wish to invest for 10 to 12 years. What sector would you suggest, and what stocks in the sector would you recommend? I will be spending much of the next 10 to 12 years out of the country. Therefore, I ask that your recommendations consider that I will not have access to information that will allow me to follow my contemplated investments. So please choose my investments carefully for me.
N.E., Vancouver, Wash.
The $400 billion drug plan recently passed by Congress will assist many seniors who do not have the money to pay for costly medications. First, there’s a little-noticed provision in the legislation that Congress has conveniently neglected to popularize. Your father and other beneficiaries cannot purchase Medigap coverage that will help pay drug costs after Jan. 1, 2006. But don’t expect lower Medigap insurance premiums.
Frankly, the rules are simple. Your dad will pay the first $275 of his annual prescription drug costs. I have no idea why that number was chosen, but you can be sure that Congress will tinker with those numbers and that they will change in the coming years.
After your dad reaches the $275 threshold, Medicare will cover 75 percent of his annual prescription drug costs up to $2,200. Again, these numbers are not carved in stone, and Congress will tinker with that limit in future years.
There is no coverage between $2,200 and $3,600. If your dad spends more than $2,200, he will have an extra out-of-pocket exposure of up to $1,400. After he reaches the $3,600 threshold, Medicare will cover 90 percent of his annual prescription costs above that number. Congress will tinker here, too. This prescription drug bill will be an enormous boon for the drug industry, especially for companies such as Eli Lilly & Co. (LLY-$69.82), Merck & Co. Inc. (MRK-$47.83), Pfizer Inc. (PFE-$36.79), Wyeth (WYE-$44.28), Bristol-Myers Squibb Co. (BMY-$29.60), Schering-Plough Corp. (SGP-$18.08), GlaxoSmithKline PLC (GSK-$45.85), Novartis AG (NVS-$46.75) and Aventis (AVE-$64.93).
I advise you to invest $2,000 in each of these nine behemoths, or a total of $18,000.
The drug industry is on the cusp of a bonanza. I recall that when Medicare came into this world as a little acorn in 1965, it represented less than 1 percent of federal outlays. Today, 38 years later, (excluding Medicaid) it represents nearly 14 percent of federal outlays. In fact, Medicare is the fourth-largest government outlay after defense (19 percent), Social Security (23 percent) and interest on the national debt (18 percent). Today’s $400 billion drug costs could easily quadruple in a dozen years.
People always want more from the government than they are willing to give, and it’s becoming a zero-sum game. People are taking more and more of less and less, and at some point there will be no more givers, so the takers will begin taking from each other.
Because the government will cover drug costs, the use of prescription medications in the coming dozen years will rise faster than at any time in history. You can take that to the bank. The 2000 census reported that 35 million people over 65 are now living in the United States. That number is expected to grow to 39 million by 2010. That’s 39 million seniors who will blow drug spending through the roof because they believe it’s free.
The government will pay and subsidize drug costs for most of these seniors. Those nine drug companies may enjoy the genesis of their most profitable years.
In the past decade, Schering, Aventis, Lilly, Wyeth, Merck, etc., doubled their revenues and tripled earnings. The price of the average drug stock over that time increased fourfold. That was when the federal government did not subsidize prescription drug prices. Over the next 10 to 12 years, it’s not unreasonable to assume that the future performance of these nine major drug companies may impressively exceed their performance during the past decade.
There may be other sectors that may have significantly better potential returns, such as nanotechnology, robotics, plasma fusion, particle physics, quantum biology, etc. However, these are emerging disciplines, and selecting good, representative companies in those fields is like looking for a March hare in a rain forest.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at email@example.com.